High Falls News - January 12, 2010

The passage of the “Healthcare Bill” by the Senate demonstrates most clearly the challenges our economy faces going into the new decade. The “pork” and “earmarks” attached to this bill, while expected, should leave a bitter taste in our collective mouths. President Obama has repeatedly promised “transparency” in his administration and championed “healthcare for everyone” as a key plank in the Democrats’ plan for our future – yet his popularity continues to fall as the realization crystallizes that it really is not “different this time”. The unconscionable actions of leaders Reid and Pelosi to ram through a reform that most Americans feel we can ill afford as revenge for 8 years of Republican largess begs the question, “Who do our legislators really represent, our interests or their own?”

Fortunately, we will once again be bailed out of the economic mess by American business. We foresee continued progress in recovery in 2010. Certainly there are many doubters right now, but the “experts” we follow see continued strengthening in our economy and modest forward progress this new year. But, not all of us will see improvement – unemployment will continue to be high and underemployment even higher as our economy adjusts to “the new world order”.

The first decade of the new millennium has been the worst in the markets history for those of us that depend on U.S. stocks to grow our portfolios – we have endured a string of crashes, crises, financial scandals, recessions and collapsed bubbles which resulted in about a 10% loss overall for the S&P 500 (Wall Street Journal, December 30, 2009). The 2009 recovery has, however, set the stage for improvement going forward as corporate profits are improving along with overall corporate productivity. Inventories remain low and while continued caution is advised, the outlook for reinvigorated global growth is continuing to broaden the markets for many of the S&P 500 companies.

We expect 2010 to be another year of volatility in the markets, but with continuing improvement in both corporate profits and S&P 500 results. Sometime in the first quarter a 5-10% market correction seems quite likely, but it will be short and intense, and followed by a strong upsurge in equities over the remainder of the year. A well diversified portfolio which includes many solid dividend paying S&P 500 stocks, international holdings in both the developed and emerging markets, and some high yielding master limited partnerships should do well in 2010.

The real test for 2010 results will come as government stimulus programs end and the Federal Reserve once again begins to raise interest rates to fight inflation and strengthen the US dollar. Unfortunately, this also means higher taxes and more government stimulus which increases overall debt. However, companies are also flush with cash which provides financing for capital investment and acquisitions.

We expect fixed income securities, both corporate and treasury bonds, to continue to perform poorly in this new year. Conversely, we expect equities, especially those large companies with significant foreign market exposure, to do moderately well during 2010. The S&P 500 index has rebounded from the March 2009 low of 666 to its current level of 1115. Money market rates remain at unreasonably low rates and there is still a huge amount of investor cash sitting on the sidelines in these vehicles. As the year plays out, we expect to see much more of this cash committed to equities which will result in continued positive results for equity markets.

Caution is still advised, however, since a recovery without strong job growth leaves us with a still fragile economic system and consumer spending that will not recover for some time into the future. As a safety net, we will use the S&P 500 index as a guide to either increase or decrease exposure to stocks. A 5% pullback to 1075 on the index will be the signal to “take some money off the table”. An increase to 1200 would suggest committing more money to large cap equities that pay good dividends.

2010 will continue to be a year of great challenge for portfolio managers, but in the end our economy should be looking much healthier and many of the fears of financial meltdown only a bitter memory. The problem of servicing our national debt will then become the critical element in future economic expansion. If we continue to build savings in spite of tax increases we can repay this debt to an acceptable level and once again our childrens’ future will look bright.



The projections of returns for specific investment types are estimates and projections and therefore prone to error. Actual returns may differ significantly from projections. Your experience will differ from the performance of specific asset types to the extent that several types exist in your account, and to the extent that your specific investments perform differently than the average of that asset type. Whether any of the asset types mentioned above are suitable for your account must be determined individually, and your portfolio may not contain some of the asset types described. These views represent an appraisal of possible events. Outcomes and performance is not guaranteed. The investments listed may go up or down in value, and they are not suitable for all investors. Securities offered through Ensemble Financial Services, Member FINRA (formerly the NASD, SIPC).